A short-term financing solution based on your future revenue.
Struggling to qualify for a small business loan, but don’t have enough collateral to back it? A cashflow loan could help you cover an emergency expense or secure working capital. But it can get expensive and isn’t meant as a long-term solution. It’s also not the only fast-financing option out there.
What’s a cashflow loan?
A cashflow loan is a type of short-term loan based on your business’s future revenue. Also known as an ACH loan, it’s similar to a merchant cash advance, which is secured by your business’s future credit card sales. In fact, some lenders offering cashflow loans refer to them as merchant cash advances, possibly because it’s a more familiar term for borrowers. How much your business is eligible to borrow usually depends on how much money it brings in each month.
Business owners that don’t have strong credit might qualify for a cashflow loan. However, many lenders require your business to be around long enough to have sufficient revenue history — sometimes as long as two years. Others might have minimum revenue requirements as well.
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How do cashflow loans work?
Some cashflow loans, like those offered by OnDeck, work a lot like business term loans. Here, the lender charges interest and fees, which you pay back in fixed repayments over a set period of time. But more commonly, lenders charge a fixed fee that you repay with a percentage of your daily deposits.
How much it costs
Like with a merchant cash advance, lenders express this fee with a number called a factor rate. Lenders multiply your loan amount by the factor rate to get the total amount you have to pay back. Factor rates typically range from around 1.15 to 1.55, though they can get higher.
Let’s take a look at an example: Say a small business takes out a $10,000 cashflow loan with a factor rate of 1.55.
It’d have to pay back a total of $15,500 with a percentage of its daily deposits. It owes this amount no matter how quickly it pays off the loan. So, unlike with loans that charge interest, it won’t save by paying off the loan early.
How repayment works
Repayment on cashflow loans typically works a lot like merchant cash advances. Lenders withdraw a percentage of your daily deposits until the loan is paid off. This method of repayment can be more forgiving than other types of short-term financing because you’re often allowed to make $0 repayments if you don’t have any deposits that day.
However, your business has a limited amount of time to repay the loan, often to the tune of one to two years. Some lenders have minimum monthly requirements for repayments and charge fees if your business doesn’t meet them.
How to apply for a cashflow loan
Many lenders offer online applications your business can fill out in a few minutes. The lender then reviews your application, lets you know if it thinks your business is eligible and asks for additional information or documents needed to make a decision. If it thinks your business is a good fit, it gives you an offer outlining the terms and conditions of the loan, which you sign and return.
Typically, you can get your funds from a cashflow loan within a day or two if you apply online.
While eligibility requirements vary, lenders typically aren’t as interested in your credit score as much as factors like your time in business, daily deposits and average monthly revenue. Businesses that have less than two years of experience might have trouble finding a lender, though it’s not impossible.
Documents needed to apply
Since cashflow loans are based on your future deposits, lenders want to look at your business bank account more than anything else. Generally, lenders ask to see at least six months of business bank statements, though some might ask for online access to view your account. You might also need to provide a voided check and state-issued ID for all account holders.
Benefits and drawbacks of cashflow loans
Still unsure whether a cashflow loan is right for your business? Weigh the pros and cons to decide if this short-term financing option could work for you.
Benefits of cashflow loans
- Bad credit OK. Since these loans are determined by your business’s revenue, cashflow lenders generally don’t care as much about your personal credit score.
- Flexible repayments. Most lenders allow you to pay $0 if your business doesn’t bring in any sales one day — as long as you can pay off your loan by the time the term is up.
- Quick turnaround. Typically, your business can get funds in one or two business days, sometimes even less.
- No collateral necessary. Cashflow loans are based on your business’s future revenue, not the value of a specific asset.
Drawbacks of cashflow loans
- Can be expensive. Like merchant cash advances, cashflow loans are some of the more expensive types of business financing out there.
- Not for startups. Many cashflow loan providers only work with businesses that have been around for at least two years.
- Might require additional backing. While cashflow lending doesn’t require collateral, some lenders might ask for a personal guarantee or a lien on your business assets.
- Daily repayments. Even though repayments are based on your revenue, it can be difficult to grow or take on new projects until the loan is paid off.
Cashflow loans vs. asset-based lending
Both cashflow loans and asset-based lending can be a solution for businesses struggling to qualify for traditional financing. The main difference is that a cashflow loan is more like an advance and doesn’t require collateral. Asset-based lending, on the other hand, is backed by money your business already has: inventory, accounts receivables, assets listed on your balance sheet and anything else that can be quickly traded in for cash.
Sometimes lenders present cashflow loans as an alternative to asset-based lending, since your business doesn’t need to have collateral to qualify. But asset-based lending can be a better choice if your business is looking to grow or take on a new project, since it typically comes with monthly repayments.
4 cashflow loan alternatives
Cashflow loans aren’t the only way your small business can cover emergency costs or secure working capital. Here are a few alternatives to consider:
1. Merchant cash advances
As we’ve already mentioned, merchant cash advances are a lot like cashflow loans. The main difference is that they’re based on your business’s credit card sales rather than revenue as a whole. They’re also more popular than cashflow loans, which means retail, e-commerce and other businesses that heavily rely on credit card sales might be able to find more lenders with this option.
2. Invoice factoring
Invoice factoring is a financing solution for businesses whose clients are other businesses and government agencies. It’s an advance on your unpaid invoices, which you sell to a factoring company at a discount.
Like cashflow lenders and merchant cash advance companies, factoring companies don’t care about your personal credit score as much as the value of your unpaid invoices. However, it can also be more expensive than other types of financing.
3. Short-term loans
Short-term business loans work a lot like traditional term loans, where your business borrows a fixed amount and pays it back over a period of time — plus interest and fees. The difference is that your business has less time to pay it back — usually 18 months or less — and APRs can often reach the triple digits. Some lenders that advertise alternative business loans charge a fixed fee instead of interest, which works a lot like a factor rate.
Short-term loans can be a good alternative for younger businesses with an emergency expense. Short-term business lenders typically only require you to be in business a few months, work with poor-credit borrowers and don’t have the same revenue standards as cashflow lenders.
If you can afford to spend a little more time on the application and only need a small amount of funding, microloans might be the way to go. You can find these small-dollar loans at nonprofits like Accion, which often come with more favorable rates and terms than the other alternatives. Many microlenders have minimal credit and revenue requirements and work with new businesses, though it could take more than a few days to get your funds.
Cashflow loans can be a quick fix for business owners who need funding but don’t have the collateral or credit score to qualify for a traditional term loan. However, the high cost and daily repayments make it less than ideal as a permanent financing solution.
Read our guide to business loans to learn more about how they work and compare other options.
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